Viacom, Blockbuster to Merge in Paramount Bid : Business: Companies will sweeten cash offer in an attempt to derail QVC takeover of entertainment giant.

In a cliffhanger worthy of a Hollywood box office hit, Viacom Inc. and Blockbuster Entertainment Corp. agreed to merge Friday as part of an eleventh-hour gambit to derail a marriage between QVC Network and Paramount Communications Inc.

Under the proposed merger--the result of marathon negotiations over the last three days--Viacom-Blockbuster said it will sweeten the cash portion of its bid to $105 a share, or a total of $6.5 billion, for 50.1% of Paramount’s stock. The move was the most dramatic yet in the 4-month-old takeover brawl for the entertainment giant that includes Paramount Pictures and Simon & Schuster.

It was also one of the most extraordinary actions in U.S. corporate history. Analysts on Friday were scratching their heads to determine the ramifications, since there appears to be no precedent for two companies as large as Viacom and Blockbuster merging in order to facilitate a takeover.

Viacom, which owns MTV and Nickelodeon, and Blockbuster--the highly profitable home video giant--valued their stock-swap merger at $8.4 billion, based on Friday’s closing stock prices. If they succeed in acquiring Paramount, it would create an entertainment behemoth with a stock market value of $26 billion, annual revenue approaching $10 billion and about $1.4 billion a year in cash flow.

Despite raising the cash offer for Paramount, the total value of the deal is estimated at about $9.7 billion. Many traders and analysts reacted angrily to the new bid because even though its cash portion tops QVC’s $92-a-share bid, the overall value of the Viacom-Blockbuster bid is lower than QVC’s offer of $9.9 billion. Complicating the takeover battle is the fact that the stock prices fluctuate daily.

News of the merger agreement initially set off confusion on Wall Street over whether the Viacom-Blockbuster bid would reset the clock another 10 days or whether some Paramount shareholders would go ahead with plans to offer their shares to QVC, the home shopping channel headed by former Hollywood mogul Barry Diller.

Paramount said Friday its board would meet next week to consider the Viacom-Blockbuster bid.

QVC on Friday charged that Viacom’s new offer violates bidding procedures previously agreed to by the parties in the Paramount fight. On those grounds, QVC’s lawyers held that Viacom’s new offer does not “trigger a new round of bidding,” implying that QVC might seek a legal challenge to the latest move.

QVC said it will decide over the weekend about extending its tender offer, but one source close to the company said it had no plans to raise its bid.

The Viacom-Blockbuster merger would create a colossus in its own right, regardless of whether it wins Paramount. Indeed, some industry observers believe Viacom Chairman Sumner M. Redstone is getting an insurance policy in Blockbuster should his bid for Paramount fail. Blockbuster Chairman H. Wayne Huizenga, meanwhile, is said to be motivated by a need to expand beyond his core business of video stores, which many believe have a limited future.

Some on Wall Street, however, questioned whether Blockbuster had erred by essentially putting itself on the market by agreeing to be acquired by Viacom. Since Blockbuster is technically incorporated in Delaware and the company has agreed to give up control to Redstone, then based on recent Delaware court rulings Blockbuster is required to begin auctioning itself off to the highest bidder, some analysts said.

Previously, Viacom on its own was offering $85 per share for 51% of Paramount, compared to $92 per share from QVC. Both companies also were offering a package of securities for the remaining 49%.

Analysts noted that the “blended value” of the revised Viacom-Blockbuster offer--the combined value of cash and stock--was less than QVC’s tender offer currently on the table.

“It’s a lower bid,” said Furman Selz analyst John Tinker. “But it’s a greater proportion of cash. So QVC will probably have to increase its cash portion a little bit. The real issue is Viacom and Blockbuster now have another 10 days to figure how far they really want to go.”

Jessica Reiff, an analyst with Oppenheimer & Co., said that “there is no question that Viacom has a higher cash bid. But it’s only 50% of the company. So the real value is in the back end, and we’ll know about that next week when trading begins again.”

Viacom class A stock fell 88 cents to close at $46.13 in trading Friday on the American Stock Exchange, while Viacom class B stock fell $1.75 to close at $41. Paramount rose 75 cents to close at $79.25 on the New York Stock Exchange, and QVC climbed $1.25 in over-the-counter trading. Blockbuster closed at $28.38 a share, down $1.50, on the NYSE.

Trading in Viacom and Blockbuster stocks was halted before the announcement was made Friday afternoon, making it difficult for analysts to calculate the value of the new bid based on market reaction.

Under the merger agreement, Blockbuster shareholders will receive 0.08 of a share of Viacom class A stock, 0.60615 of a share of Viacom class B stock and one “variable common right” for each share of Blockbuster that is convertible to class B shares.

If Viacom-Blockbuster is successful in acquiring Paramount--the merger is not contingent on the tender offer--Blockbuster has agreed to invest an additional $1.5 billion in Viacom through the purchase of Viacom class B shares. The companies said that will provide Paramount shareholders a richer cash reward without diluting their stock.

Viacom’s Redstone, who previously said that the bidding for Paramount had reached “Never, Never Land,” defended the decision to raise the cash portion of the offer Friday on the grounds that the extra money was coming from its merger partner, Blockbuster.

“Viacom has not had to add one more cent from our last offer in order to increase the cash component,” he noted.

Redstone said the proposed merger builds upon Viacom and Blockbuster’s shared vision of becoming a broad-based entertainment giant for the anticipated technological revolution in interactive television and video on demand.

Redstone would still control about 60% of a merged Viacom and Blockbuster, and would hold about 30% of the equity. Blockbuster’s Huizenga would apparently take a secondary role.

Unclear is what role, if any, Paramount Chief Executive Martin S. Davis would play in a combined Viacom-Blockbuster-Paramount entity. Although Davis had been tagged to become chief executive officer under a Viacom-Paramount merger, there was no mention of him in the Viacom-Blockbuster announcement.

Davis “understands the situation a lot, and whether there is a role for him to play is something we will give a lot of thought to,” Redstone said. “But no matter what the outcome, (Viacom chief executive Frank Biondi) will be C.E.O.”

The subject of a full-scale merger, first raised last summer, came up again in late December, according to sources, with talks led by Huizenga and Blockbuster Vice Chairman Steven Berrard on Blockbuster’s side and Redstone and Biondi on Viacom’s side. Berrard and Biondi talked briefly about the deal over the holidays in Arizona, where both happened to be vacationing.

Negotiations rose to a frenzy this week, continuing nonstop from Wednesday until the deal was signed Friday afternoon. Most participants got little or no sleep.

The most difficult issues eventually came down to control and price, as they do with most mergers. In an interview, however, Berrard declined to single out any specific hurdle, saying much of the time was spent on “mechanical and procedural” issues over what type of Viacom shares Blockbuster stockholders would receive.

In the end, Huizenga is taking a back seat to Redstone, an unusual move for the Florida entrepreneur.

Some executives who know Huizenga well said they were surprised that he would do that, and suggested it might not be so easy for Huizenga and Redstone to work side by side because of their strong personalities. But Berrard said the two get along very well.

While Redstone will have more than 60% of the voting control of the combined company, Blockbuster shareholders will own about 60% of the equity and about 50% if the Paramount deal goes through, Berrard said.

Some in Hollywood have speculated that the Viacom deal amounts to an acknowledgment by Blockbuster that its video-rental business--however profitable it is now--has a limited life with technological advances on the horizon that would allow movie watchers to call up vast numbers of films from home.

Blockbuster’s Berrard, however, said the fear of becoming obsolete was not a motivating factor.

* RELATED STORIES: A17

A Potential Mega-Merger

A three-way merger of Paramount Communications Inc., Viacom Inc. and Blockbuster Entertainment Corp. would create an entertainment colossus with holdings in everything from cable and satellites, to TV, movies and video rental, to professional sports.

COMBINED FINANCES (1992)

Revenue: $7.4 billion

Profit: $452.4 million

Earnings per share: $3.58

Employees: 40,750

HOLDINGS (1992)

Cable television: 1.1 million customers

Cable networks: MTV, VH-1, Nickelodeon, Showtime, The Movie Channel, FLIX, USA Network (joint ownership) including the Sci-FI channel.

Video retail outlets: 3,593

Music stores: 507 in the U.S. and seven foreign countries

Music publishing: more than 100,000 music copyrights

Movies: 3,790 film library; Paramount film production studios

Movie theaters: 1,927 screens in the U.S., Canada, U.K. and nine foreign countries

Television production and syndication: “Star Trek, The Next Generation,” “Entertainment Tonight,” “Matlock,” “Diagnosis: Murder,” “The Montel Williams Show”

Spelling Entertainment Group: (70.5%)

A 35% interest in Republic Pictures Corp., which merged with Spelling Entertainment Group

Performance venues: Madison Square Garden in New York, including the 20,000 seat arena

Sports teams: New York Nicks (basketball), New York Rangers, Florida Panthers (hockey), Florida Marlins (baseball), Miami Dolphins (football, part ownership).

Broadcasting: 12 TV stations and 14 radio stations

Publishing: Simon & Schuster, Prentice Hall

Theme parks: six in the U.S and Canada; a 21% interest in Discovery Zone Inc., a franchisee of indoor children’s recreational fitness centers

Sources: Times reports, Company reports, Wire reports, Bloomberg Business News, Standard & Poor’s Corp.

Researched by ADAM S. BAUMAN / Los Angeles Times

Paramount Stock Pushed Up and Up

After four months, the bidding war for Paramount Communications Inc. escalated Friday. Here are some of the key maneuverings, which have boosted the price of Paramount stock:

Date: Sept. 3, 1993

Paramount stock: 56 1/4

Paramount’s stock starts climbing, spurred by rumors that Paramount may merge with Viacom.

Date: Sept. 12, 1993

Paramount stock: 61 1/8

Paramount and Viacom boards approve a merger agreement valued at $9.2 billion.

Date: Sept. 20, 1993

Paramount stock: 69 3/4

QVC Network Inc. kicks off a bidding war with a hostile $9.5-billion offer for Paramount.

Date: Sept. 28, 1993

Paramount stock: 77 3/4

Blockbuster Entertainment Corp. agrees to invest $300 million in Viacom’s bid.

Date: Oct. 4, 1993

Paramount stock: 78 1/2

Nynex agrees to invest $1.2 billion in Viacom’s bid.

Date: Oct. 13, 1993

Paramount stock: 77 3/8

Bell Atlantic agrees to acquire Tele-Communications Inc., which is finishing its acqusition of Liberty Media. The Bell Atlantic merger is viewed by many Wall Street analysts as adding financial backing to QVC’s bid for Paramount.

Date: Oct. 17, 1993

Paramount stock: 75 7/8

QVC’s bid for Paramount is bolstered by an extra $1 billion in financing secured from Cox Enterprises Inc. and Advance Publications Inc.

Date: Oct. 21, 1993

Paramount stock: 76

QVC switches to a two-part tender offer for Paramount, valued at $9.5 billion. Trading in Paramount shares was temporarily halted after the announcement.

Date: Oct. 24, 1993

Paramount stock: 77 5/8

Viacom launches a competing two-part tender offer for Paramount valued at about $9.6billion. The new offer was quickly approved by Paramount’s board of directors.

Date: Nov. 6, 1993

Paramount stock: 80 1/4

Viacom increases the total value of its bid for Paramount to $10.1 billion.

Date: Nov. 11, 1993

Paramount stock: 82 1/2

BellSouth agrees to invest $1.5 billion in QVC’s bid; Liberty Media arranges to divest its interest in QVC and withdraws from its $500 million investment agreement with QVC.

Date: Nov. 12, 1993

Paramount stock: 83

QVC raises its hostile tender offer to about $10.8 billion.

Date: Nov. 24, 1993

Paramount stock: 80 1/8

A vice-chancellor of the Delaware Chancery Court nullifies Paramount’s so-called “poison-pill” antitakover defense, but upholds a “break-up” provision of the deal which calls for a $100 million payment to Viacom if the Viacom-Paramount merger is not completed.

Date: Dec. 9, 1993*

Paramount stock: 82

The Delaware Supreme Court upholds the lower court’s ruling, finding that Paramount failed to fulfill its duties to seek the best possible transaction for shareholders. In addition, the Supreme Court invalidates the $100 million “break-up” fee payable to Viacom, which the lower court had left intact.

Date: Dec. 14, 1993

Paramount stock: 81 1/8

Paramount’s board of directors put the company on the auction block and withdraw support for a merger with Viacom.

Date: Dec. 20, 1993

Paramount stock: 82

Paramount formally accepts competing merger proposals from QVC and Viacom

Date: Dec. 21, 1993

Paramount stock: 80 1/4

QVC announces an increased bid of $11 billion for Paramount, but as QVC’s stock price slumped in midday trading, the value of the bid plunged to little more than $10.2 billion.

Date: Dec. 22, 1993

Paramount stock: 79 5/8

Paramount’s board endorsed the $10.2 billion takeover offer from QVC, intensifying pressure on Viacom to raise its offer or abandon its merger plans altogether by a January 7deadline.

Date: Jan. 7, 1994

Paramount stock: 79 1/4

Viacom and Blockbuster merge and raise the cash portion of the Paramount Bid to $105 a share.

*Considered turning point in the negotiations

Sources: Bloomberg Business News, Times reports, Wire reports

Researched by ADAM S. BAUMAN / Los Angeles Times

The Bids at a Glance

Viacom-Blockbuster and QVC are both offering cash amounts for 50.1% of Paramount stock and packages of securities for the remaining stake. Because the packages of securities are tied to each bidder’s stock price, they fluctuate in value as the stock prices change. But the cash component represents a fixed value for Paramount’s shareholders. Although the current QVC bid is valued at $9.9 billion against Viacom-Blockbuster’s new offer of $9.7 billion, the cash component of the Viacom-Blockbuster offer is 14% higher than QVC’s cash bid.

COMPARING THE OFFERS

Viacom Old bid:

Cash value per share: $85

Total value: $9.3 billion

Viacom-Blockbuster New bid:

Cash value per share: $105

Total value: $9.7 billion

QVC Current bid:

Cash value per share: $92

Total value: $9.9 billion

WHAT’S AHEAD

Bidding: QVC, which is contesting the latest bid, has until Jan. 21 to make a new offer.

And more bidding: Under Paramount’s bidding rules, Viacom and Blockbuster would have another 10 days to top a higher QVC offer.

And more meetings: Paramount directors will meet next week to consider the latest Viacom/Blockbuster offer.

Decision time: Paramount shareholders decide individually which suitor to tender shares to.

Meanwhile: Blockbuster and Viacom shareholders vote on the merger of the two firms.

Approvals: Regulatory clearances, such as from the Federal Communications commission, are sought.

Researched by ADAM S. BAUMAN / Los Angeles Times